Last month, the Consumer Duty turned 3yrs old. Positioned as the centrepiece of how outcome principles based regulatory framework should work, it is really coming into its own as growth in technology and AI begs the question – is it OK to use AI in a regulated environment and how safe is it to use under the watchful eyes of regulators?
The recent Mills review addressed this area by making it clear that the existing framework is fit for purpose and that firms should not expect a whole raft of AI specific rules to come flooding in. I tend to agree with this approach as at the heart of the Consumer Duty is the overarching requirement for firms to put their client’s interest first, protect those clients from foreseeable harm and ensure delivery of good outcomes. Three years on from the Duty implementation, we are seeing more and more supervisory action being taken by the FCA in relation to Consumer Duty as well as lots of feedback being published to industry regarding good and poor practices via the FCA’s thematic work.
I think it is fair to say that if you or your firm is not using AI today, you will be in the next 12 months in some way shape or form. As consultants we hear from a vast array of firms looking to implement AI in all sorts of ways which from a regulatory perspective screams RISK!! So how do we break this down into a way that your firm achieves what it wants to achieve, whilst gaining comfort that any risks created by the use of AI are mitigated through effective controls. Before you say “no” to AI, you should ask the questions which sit firmly embedded within the outcome principles-based framework in which we operate.
CONSIDERATIONS TO ADDRESS DURING AND POST IMPLEMENTATION OF AI:
- In line with PRIN 3, does your firm have an adequate level of risk management in place to monitor this risk?
- In line with PRIN 12, could the AI tool affect the customer outcome? If so, then let’s widen this question to Consumer Duty and its 3 cross sector objectives:
- Is an adequate level of protection in place to avoid foreseeable harm, and how will you monitor this
- Is the AI tool working in the best interest of the customer
- Will the AI tool support the customer in achieving their financial objectives or conversely, could the AI tool prevent this in anyway?
- Then the thought process should look at the customer journey design and discover whether the target market customer is able to understand the journey, is the introduction of AI going to potentially create exclusion of vulnerable customers? What control gates need to be in place to check for accuracy of outcomes
- In line with SYSC 6, what policies and control frameworks need to be in place to manage risk appropriately?
- What policies will be in place and training for staff who will access the AI tool and a wider thought on how other AI tools can be used by staff?
- How do those responsible for the activity demonstrate control and oversight of the activity?
- How will the usage of AI create adequate customer records to refer back to in the event of a complaint?
- In the event of an outage, how resilient is the business’s operating model to revert to human-led processes, could an AI outage create a business continuity issue? If so, how can your firm mitigate this risk?
So lots to think about here and if not already present, how AI will feature in Consumer Duty Board reports moving forward. The extent to which this should be included very much relates to how dependent the firm is on AI to deliver its products and services to clients, how involved the AI will be on delivery of communications, and how AI will assist clients in understanding information provided. Demonstrating that the use of AI, which is often deployed to reduce cost of delivery, is not creating exclusion or affecting friction in such a way that could impact a client’s buying decision or the post-sale support they require.
I started this article by referring to the anniversary of consumer duty having just passed. Whilst AI is likely to be the largest emergence in firms over the coming years, you should also be asking yourself and your firm, what have you learned in the last three years of Consumer Duty, take stock of what changes and improvements your firm has made as a result of the duty. With this in mind, how will you ensure that Consumer Duty board reports moving forward are able to address the effectiveness of AI and its impact on customer outcomes?
Given the Duty is now three years old and with, have you considered having external validation of your actions taken to implement and report ongoing performance?
Speak to our team to arrange an independent Consumer Duty and AI readiness review.
